Baosteel adopts “balanced” price policy as pressures mount

Baoshan Iron & Steel Co, the listed arm of China’s top steel producer China Baowu Steel Group, stated in a May 12 release that when adjusting its list prices, it needs to consider the business circumstances of its consumers while being mindful of the higher production costs it is incurring. The statement, issued two days after it added significantly to its prices for June domestic sales, seems to be the steel giant’s response to end-user dissatisfaction over mounting prices.

Its latest pricing policy explained

As reported, on the evening of May 10 Baosteel announced it was raising its list price of hot-rolled coil (HRC) – a key product in its catalogue – by Yuan 300/tonne ($46.6/t) for June sales. Though the raise was quite large, the increment was much smaller than that of the climb in spot prices. According to Mysteel’s assessment, as of May 12 the national price of Q235 4.75mm HRC price had surged Yuan 1,222/t on month to Yuan 6,737/t including the 13% VAT, the highest since July 2010 when Mysteel commenced the survey.  Baosteel added a larger Yuan 650/t to the June list prices of cold-rolled coil (CRC).

“Most of (our) company’s downstream customers are long-term clients, and Baosteel – as one link in the whole supply chain – needs to ensure that our pricing policy both reflects the higher production cost burden while at the same time, showing consideration for the stable operations of our major clients,” it said in the release. “We need to balance the profits of both upstream and downstream elements in the supply chain.”

For Baosteel, its cost headaches currently are being caused by soaring raw materials prices. As of May 12, Mysteel SEADEX 62% Australian Fines increased to $233.7/dmt CFR Qingdao, up $60.95/dmt on month and refreshing new high since Mysteel commenced the assessment in January 2010.

“The prices of (Baosteel) hot-rolled steel products had already witnessed obvious rises earlier (so) the adjustment (for HRC prices) is not as sharp as the rise in general market prices, while the increment in cold-rolling products is a bit wider,” Baosteel explained.

Caring for its major end-user customers

In its statement, Baosteel said it expected that this quarter would be a comparatively tough period for auto manufacturers, which would struggle from the shortage of semi-conductors, with the greatest impact being felt from mid-May to late June, it said. This would further affect Baosteel’s cold-rolled auto steel sales by 50,000 tonnes per month, though total CRC? sales in 2021 are expected to remain above 8 million tonnes.

“Some car manufacturers are planning to bring forward their ‘high-temperature holiday’ period to late May-early June – from the usual July-August period – and try to boost production during those two months,” Baosteel maintained. China’s vehicle producers usually arrange holidays of around two weeks for workers when the summer heat peaks.

Baosteel also noted that for the electrical home appliances sector (whose members are also major Baosteel customers), exports account for a large portion of total sales, and if the production costs remain high, manufacturers might have difficulty concluding more orders. But the steelmaker also observed that if the consumers could accept higher products prices, then demand for appliances has the chance to stay firm.

For the machinery sector, sales in the January-March quarter were good, but sales in Q2 have softened, Baosteel argued, amid the slowing demand from the property and infrastructure sectors. By Q4 however, demand should have recovered markedly as the progress of projects would accelerate by year end.

Baosteel also noted that the stocks of raw materials (including steel) held by consumers are lower compared with prior years, given their concern about the prevailing high levels of steel prices.

Baosteel observed that over time, the rises in raw materials prices might help downstream sectors adjust their market structure. “Those more competitive enterprises will develop better and leading home appliance producers will be able to digest higher production costs more effectively thanks to their high-end products. They can pass their higher costs to ultimate consumers via the ‘brand’ effect (while) the less competitive enterprises might be weeded out,” Baosteel said.

Changes in steel fundamentals in the future

Philosophizing about its business going forward, Baosteel noted that for the medium- and long term, the goal of many countries is to achieve carbon neutrality – an objective that will probably see the supply of steel contract were it to be achieved. China’s steel sector aims at realizing peak carbon earlier than 2030, when all the country’s industries should meet the target, Baosteel warned. In the meantime, domestic steel mills are effectively banned from adding new steel capacity.